Research On The Construction Method Of A CDO Asset Pool Based On Economic Cycle

The global financial crisis of 2008 shocked the whole world. The direct cause of this crisis was the long chain of financial derivative products so that asset pricing bubbles were over-expanding until bursts. As tools for financial innovation, collateralized debt obligations were questioned. But CDOs with good risk management will not bring such big bubbles and crises. CDOs are of momentous significances to banks, investors and society, such as increasing the liquidity of bank assets, adjusting bank asset/liability structures, transferring and avoiding business risks, increasing investment channels, perfecting China's capital market and so on. But these products have high risks, especially credit risk. One of the most fundamental reasons of credit risk is the bad quality of the CDO asset pool. Therefore, a CDO asset pool with good risk controll can bring the advantages of the CDO into play and avoid the weaknesses.Regarding the subject of building a CDO asset pool, there are mainly theoretical researches. Some scholars use the programming model to study the design of non-performing assets' securitization, but nobody researches on the construction method of a CDO asset pool.This paper introduces the concepts and features of CDOs, and analyzes the effect of a CDO asset pool's construction and economic cycle on bank risks in advance. Then the paper expatiates upon the construction method of a CDO asset pool based on economic cycle, including four steps. First, this paper uses an HP filter approach to divide economic cycle into four phases. Second, we can choose industries of different economic cycles' stages with good comprehensive evaluation values by fuzzy analytic hierarchy process. Third, using the gaussian copula method, this paper gives credit risk of the CDO asset pool. And the credit rating transition matrix of each stage which is the basis for analyzing earnings and credit risk of the asset pool was constructed based on industries of different economic cycles' stages. Fourthly, in terms of selection criteria of an asset pool, we can construct a CDO asset pool by Monte Carlo simulations and Quadratic Programming methods. Finally, this paper gives an example of constructing a CDO asset pool, and analyses the result and credit risk of the CDO asset pool. Then the paper concludes that the asset pool has a moderate credit risk.